US: The case for additional labor market weakness is clear – Wells Fargo

On Friday, the US official employment report will be released. Market consensus is for an increase in payroll by 200K. Analysts at Wells Fargo point out the demand for workers has started to roll over. They argue job openings and hiring plans have declined since the start of 2022, and the trend in layoffs is no longer improving.

Some reports suggest labor market is cooling more than recent payroll numbers indicate

“The buoyancy of nonfarm payroll growth has seemed at odds with other signs that the jobs market is beginning to sour. We look for nonfarm payroll growth to downshift more noticeably in the months ahead, beginning with December's employment report showing hiring slowing to 205,000.”

“Other gauges of hiring, including the household survey, PMI employment indices and the latest Quarterly Census of Employment & Wages, suggest that the labor market is cooling more than the recent payroll numbers indicate.”

“As we look ahead, the case for additional labor market weakness is clear. If additional labor supply is not forthcoming, it will take softer labor demand to bring nominal wage growth back toward a pace that is consistent with the Fed's 2% inflation target. This is one reason the FOMC is still contemplating additional rate hikes even as other sources of inflationary pressure, such as spiking gasoline prices and hampered supply chains, have eased in recent months.”

“What remains to be seen is whether the Federal Reserve can engineer just the right amount of labor market cooling such that labor cost growth—and by extension inflation—sufficiently slows without causing a major increase in unemployment.”